Let me start by saying that you can’t impose morality and ethical behavior through legislation. Those that wish to take advantage of others for personal gain by nature do not follow the rules. Therefore, any legislation or rules attempting to enforce moral character, in my opinion, will not work. Don’t get me wrong, I think that change is necessary in the financial services industry, but there must be a better way.
I believe it is every financial advisor’s moral responsibility to put the clients’ interests ahead of their own with no exceptions.
Taking into consideration my statement above, the debate for a uniform fiduciary standard is flawed. Given the current model, registered investment advisors (RIAs) are regulated by the SEC (primarily under the Investment Advisers Act of 1940) and are the only type of advisor held to a fiduciary standard and are legally required to work in their clients’ best interest. Essentially this means that all other advisors have a moral (but not legal) responsibility to work in the clients’ best interest.
I personally feel that the SEC and FINRA are ill-equipped to provide the necessary level of enforcement required if all financial advisors are fiduciaries. Given the rampant cases of investor fraud across the country, I see no end in sight, with nominal punishments for bad behavior.
For example, I recently read an article that mentioned an advisor receiving a $5,000 fine and one month suspension for cheating on his continuing education (CE) courses. Will that punishment curb the behavior in the future? I doubt it. Cheating is the result of someone’s conscious decision to break the rules. It’s a mindset. Once the line is crossed, what’s to stop that person from doing it again, but on a larger scale? In this instance, after one month, the advisor can begin to solicit business and work with clients to manage their money again. Would you want someone who has cheated in the past manage your money? I know I wouldn’t.
As the media clearly points out via the regular flow of articles on advisor misconduct, the current punishments are not curbing the behaviors. I’m an advocate for more substantial and strict punishments for misconduct and illegal activity. But that’s not going to solve the problem and neither is a legal responsibility.
An industry centered on money will always attract criminal activity.
Next, there is the argument of compensation in which I revert back to my previous statement. Regardless of how an advisor is compensated, I feel it is their “moral responsibility” to put the clients’ interest first. There isn’t a compensation model available today that eliminates biased advice. Commissioned advisors may be biased by offering insurance products and/or investments that pay them a higher commission. However, fee-only advisors provide recommendations that may be biased as well. For example, advisors have certain insurance products and investment vehicles that they prefer to offer their clients based on past performance, familiarity with the product, and their own personal preferences. The manner in which they are compensated does not deter them from favoring certain insurance and investment vehicles in their financial plans for clients. Therefore, their advice lends itself to bias because of their own personal preferences.
How do we protect ourselves and minimize the risk of being the victim of fraudulent activity? Become more aware! In most cases when we think of crime, we protect ourselves with things like neighborhood watches and self-defense classes. We watch shows and read articles on crime prevention. Why? We are afraid of physical harm. However, when it comes to our money, Americans find themselves less than prepared to protect themselves. With skyrocketing debt-per-household numbers and bankruptcy filings in American, it is clear that we are not holding ourselves accountable. According to a financial literacy study titled “Study Regarding Financial Literacy Among Investors” conducted by the SEC in August 2012, they discussed the existing level of financial literacy in the U.S.
As stated in the findings: “Studies reviewed by the Library of Congress indicated that U.S. retail investors lack basic financial literacy. The studies demonstrate that investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.”
Dare I say that we have a financial literacy epidemic on our hands? A uniform fiduciary standard doesn’t change the fact that an investor may not even know if an advisor is working in their best interest (even if they were) because he or she may lack elementary knowledge of financial concepts and critical knowledge on how to avoid investment fraud as stated in the study findings.
Perhaps if we better educate the average investor by providing sound and unbiased financial education, we can better equip investors to be able to identify potential investment fraud and empower them to select the type of advisor that is appropriate for their specific needs. In my opinion, there needs to be a cultural shift in the country rather than a legislative movement to clean up the industry.
There is no easy answer to the problems plaguing the financial industry and America, but as an industry, all sides must come together to make any substantial progress and stop casting blame.
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